TPP Your Questions Answered February 26

Find out what our members are asking this month…

I have a client who lives in South Manchester and an employee who lives in the Manchester area. They don’t have an office. Every week they meet for company-funded meetings and lunches. I think this would be classed as travel because they are working somewhere that is not their usual place of work. I just wanted to check if this was true – as the alternative would be to entertain staff and would be restricted by the £150/person limit.

A

In short, this does not seem to fall under the rules of travel and subsistence. For travel (and related subsistence needs) to be tax-free under ITEPA 2003, workers must travel to a temporary place of work. If an employee does not have an office and works from home, their home is generally treated as a permanent workplace.

In this case, the key factor is regular weekly meetings. If an employee attends the same location on a regular and ongoing basis, HMRC will usually consider that location to be a permanent place of work due to their regular presence. As a result, travel to these locations does not qualify as business travel, and any related subsistence necessities (including food) do not qualify for tax relief.

Even if meeting locations vary, predictable and frequent patterns of (weekly) attendance would make it difficult to argue that each location is a temporary workplace.

If we are talking about lunch costs, these costs do not fall within the £150 per head exception for staff meals (ITEPA 2003 s264), as the exception only applies to annual events, not to recurring weekly meetings.

Therefore, HMRC will generally treat food costs as a taxable benefit, as no exceptions apply if travel regulations are not met.

From a practical point of view, companies can:

• report the costs via P11D, or
• include it in a PAYE Settlement Agreement (PSA) so that the company settles the tax on behalf of the employee.

Overall, although the meeting is clearly business-related, the regularity of the arrangement means the travel and related living expenses are unlikely to qualify for tax-free treatment.

Q

My client was a one-man consulting company that was at odds with its main customer. The customer has agreed – without admitting any liability – to pay £17,500 to my client’s consultancy company”as compensation for ending the agreement (Termination Payment).” Because there was no admission of liability, the payments were referred to as ex-gratia, although the Settlement Agreement does not use that phrase.

My question is, is this receipt taxable?

I assume, because the payment is related to a trade agreement, it will be subject to corporate tax. However, (as is usually the case with one-person consultancy firms), the contracts account for over 90% of the company’s income, so I wonder if the Exclusion here could be applied BIM40120 – Special receipts: compensation and damages: intangible assets – HMRC internal manual – GOV.UK and whether that would make it exempt from tax or if there is something else that would mean the compensation payments would not be taxable?

A

You are absolutely right that the default position is that when the agreement is canceled and compensation is paid, then it will be income as per BIM40120. If the contract represents such a large amount of business that the business essentially ceases, then the contract may be considered capital in accordance with the example in BIM35530. If it is capital, there is a good chance that it will be tax free as it will involve the transfer of intangible rights (possibly the right to sue) for an amount less than £500,000 as per CG13020.

Termination payments will generally be subject to VAT from 1 April 2022, following HMRC’s revised policy treating early termination fees as a further consideration for contracted supplies. This is a significant change from the previous position where such payments were usually considered outside the scope of VAT as compensation or damages. The new treatment means that if the original supply was subject to VAT, then any termination payments will also be subject to VAT at the same rate, and this is covered in HMRC’s revenue and customs report 2/2022 early termination fees and compensation payments, and I have attached a link below for your information.

Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments“

Q

My client owns a commercial building in London.

Last year he was given the opportunity to buy the residential property next door, which he thought was a good investment and he bought it in a separate company and paid residential SDLT for the purchase. The property is not rented but he intends to find a new tenant.

Unfortunately, it turned out there was significant noise from the commercial building into the residential property and he was having difficulty renting it out in its current condition. The commercial building will be renovated and at that time they can address the noise transfer problem. But that may take 2-3 years and in the meantime, he worries that it will fall empty. He was also concerned that he had paid the SDLT housing rates in good faith and now he did not want those rates to be challenged, only for them to be vacant or used for other purposes in the interim. Therefore, please can you provide the following suggestions:

1. If it is left empty for 3 years is this a problem for the SDLT it pays as a residential property
2. Can he do anything for this interim 2/3 year period without reducing the SDLT position – the options are:
   1. Airbnb although local councils limit such permits to a maximum of 90 days per year
   2. rent it out to third parties as short-term office space
   3. Use it as a temporary office by one of his other businesses under permission

Whether under b or c, there’s no need to do any office conversion – just someone puts a desk in the existing space.

Is there anything else you think is permissible?

If there is nothing he can do, what are the consequences of paying SDLT housing rates, if any?

A

A property’s SDLT status is based on its condition and suitability for use at the time of purchase. The property is considered to still be “residential” if the last use by the previous owner was residential (dwelling) and therefore it would be appropriate to apply residential rates at that time, despite issues with “noise pollution” etc affecting the ability to attract tenants.

If a company purchases a residential property for more than £500,000, a fixed “higher rate” SDLT rate of 17% could potentially apply based on the full price paid, rather than the lower rates and ranges that would normally apply to non-company purchases etc. There is relief from these higher rates if a property is acquired with the intention of commercial disposal (SDLTM09555) will apply in your client’s case, even if the property has not actually been rented out – given the problems with renting out the property due to noise pollution.

The relief can be withdrawn if, within 3 years after purchase, the property is no longer owned for the purposes of the exemption. If a property is not actually let out, then the property still qualifies for relief if the intention remains to rent it out (without “undue delay”), and the delay is caused by work etc on the property. Of course, seeking permission in any form where possible before work begins, or between active work, will help strengthen a claim for relief but is not necessary if the work itself precludes the granting of such permission (SDLTM09660).”

If you have questions similar to the above or would like to know more about our Tax Partner Pro membership, please email us mailto:enquiries@etctax.co.uk